Monetary policy and interrelationships in the Norwegian economy
Governor Øystein Olsen
Different horizons – different models
Long 0-1 year 1-4 years term
Statistical models (SAM)
Equilibrium models
Business cycle models (NEMO)
Horizon
Main requirements for a model for monetary policy
1. Monetary policy controls inflation 2. Expectations must be included
3. Based on theory and empirical data 4. Understandable and easy to
communicate
Growth and inflation
Percentage annual growth. Average
1980s 1995-2010
0 1 2 3 4 5 6 7 8 9
Inflation (CPI) Mainland GDP
Sources: Statistics Norway and Norges Bank
Main requirements for a model for monetary policy
1. Monetary policy controls inflation 2. Expectations must be included
3. Based on theory and empirical data 4. Understandable and easy to
communicate
“Essentially, all models are wrong, but some are useful.”
George Box (1979)
Output and inflation
Percentage deviation from trend
-6 -4 -2 0 2 4 6
-2 -1 0 1 2
Hjelpe Hjelpe
Sources: Statistics Norway and Norges Bank
Output and unemployment
Percentage deviation from trend
-6 -4 -2 0 2 4 6
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5
Output gap, left-hand scale
Unemployment gap, right-hand scale
Sources: Statistics Norway and Norges Bank
Unemployment and wage growth
Percentage deviation from trend
-4 -3 -2 -1 0 1 2 3
-4 -3 -2 -1 0 1 2 3
Wage gap
Unemployment gap
Sources: Statistics Norway and Norges Bank
Wage growth and inflation
Percentage deviation from trend
-3 -2 -1 0 1 2 3
-3 -2 -1 0 1 2 3
Wage gap
Sources: Statistics Norway and Norges Bank
The interest rate is an endogenous variable
The effect of a change in the interest rate depends on:
The reason for the change
Whether the change is a surprise
Whether the change is temporary or of
long duration
VAR model
(vector autoregressive model, structural)
Mainland GDP
Inflation (CPI-ATE)
Exchange rate
Interest rate
Isolated effect on GDP of an interest rate increase in two different VAR models
Per cent
0 3 6 9 12 15 18 21 24 27 30 33 36 39
-1 -0.5 0 0.5 1
-1 -0.5 0 0.5 1
Estimation period 1996-2009
Estimation period 1986-2009
Quarters Source: Norges Bank
Maximum impact of a 1 percentage point interest rate increase, different estimation periods
GDP
Per cent
-0.8 -0.6 -0.4 -0.2 0.0
-0.8 -0.6 -0.4 -0.2 0
1986- 1989- 1992- 1995-
2009 2009 2009 2009
Inflation
Percentage points
-0.4 -0.3 -0.2 -0.1 0.0
-0.4 -0.3 -0.2 -0.1 0
1986- 1989- 1992- 1995- 2009 2009 2009 2009
Source: Norges Bank
Number of quarters to maximum effect of interest rate change, different estimation periods
GDP
0 2 4 6 8 10 12 14
0 2 4 6 8 10 12 14
1986- 1989- 1992- 1995-
2009 2009 2009 2009
Inflation
0 2 4 6 8 10 12 14
0 2 4 6 8 10 12 14
Source: Norges Bank
1986- 1989- 1992- 1995-
2009 2009 2009 2009
Effect of monetary policy shocks,
different models/estimation periods
GDP Per cent
0 5 10 15 20 25 30 35 40
-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6
-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6
Inflation
Percentage points
0 5 10 15 20 25 30 35 40
-0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6
-0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6
Quarters Quarters Source: Norges Bank
NEMO (Norwegian Economy Model)
General equilibrium model (DSGE)
Forward-looking participants
Monetary policy controls inflation and gives weight to stabilising output
No long-term trade-off between inflation and unemployment
Estimated on Norwegian data
Effect of monetary policy shocks in the VAR models and in NEMO
GDP
Per cent
-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6
-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6
NEMO
Inflation
Percentage points
-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6
-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6
NEMO
Quarters Quarters Source: Norges Bank
Projected inflation and output gap in the baseline scenario from MPR 2/11
Per cent. Quarterly figures. 2008 Q1 – 2014 Q4
-4 -3 -2 -1 0 1 2 3 4
-1 0 1 2 3 4 5 6
Output gap, left-hand scale
#REF!
KPIXE 2/11
CPIXE, right-hand scale
#REF!
Sources: Statistics Norway and Norges Bank
Projected key policy rate in the baseline scenario from MPR 2/11 with fan chart
Per cent. Quarterly figures. 2008 Q1 – 2014 Q4
0 1 2 3 4 5 6 7 8 9
0 1 2 3 4 5 6 7 8 9
Source: Norges Bank
90% 70% 50% 30%
Key policy rate in the baseline scenario and in the alternative scenarios from MPR 2/11
Per cent. Quarterly figures. 2008 Q1 - 2014 Q4
0 1 2 3 4 5 6 7 8 9
0 1 2 3 4 5 6 7 8 9
upper 90 upper 70 upper 50
30 (upper and lower)
Source: Norges Bank
90% 70% 50% 30%
